Author: XinGPT

Micron's stock price surged today, largely due to UBS raising its rating and valuation of Micron to a target price of $1635!

So I carefully read the original report from UBS today that significantly upgraded Micron's rating, and the core issue is the change in valuation methodology.

UBS previously used a sum-of-the-parts (SoTP) valuation method for Micron, based on a price-to-sales (P/S) ratio. It split Micron into two parts: the HBM business and the core DRAM+NAND business .

• HBM benefits from the demand for AI servers and is growing faster, so it is given a higher multiple. Based on 2027 revenue of approximately US$27.89 billion and a P/S ratio of 6, it corresponds to approximately US$132 per share.
• Based on 2027 revenue of approximately US$187.7 billion and a P/S ratio of 3, the core DRAM+NAND valuation corresponds to approximately US$405 per share.

Adding the two parts together, we arrive at the original target price of $535. The implicit logic behind this method is that Micron remains a strong cyclical memory company, but its HBM business is of higher quality, hence the different revenue multiples assigned. (Figure 1)

UBS has now switched to using an overall P/E valuation, raising its target price from $535 to $1,625. The new method uses approximately 15 times NTM P/E to anchor 2029 EPS at approximately $117, and discounts back to 2028 using approximately 12% of the cost of equity.

UBS chose 2029 EPS because it believes that by then the model will have incorporated a mild memory downturn cycle. If Micron can still earn more than $100 in EPS by then, it would indicate that this is not simply profitability at the peak of a cycle, but rather closer to "profitability that transcends cycles." (Figure 2)

The core reason for the shift in valuation methods is LTAs, or long-term agreements.

UBS believes that the new round of enhanced LTAs not only lock in shipment volumes but also include 3- to 5-year terms, fixed volume commitments, and partially fixed pricing mechanisms. It estimates that by 2027, approximately 20% to 30% of industry DDR shipments will be covered by such agreements, with Micron accounting for about 20%, and Hyperscaler already securing about 60% to 70% of the industry's server DDR5 volume. This would improve Micron's revenue and profit visibility, and potentially reduce DDR price fluctuations by about half.

Therefore, UBS's assessment is that Micron is no longer just a company that makes money from the upward cycle of storage prices, but rather its profitability stability has been systematically enhanced due to AI demand and long-term price and volume lock-in agreements.

Therefore, the valuation framework has been switched from "segment revenue multiple" to "overall profit multiple". The core change is the upgrade from "HBM separate revaluation" to "Micron overall revaluation".